CIBL: spinoff, yes; catalyst, yes; possible five bagger, yes

I want to thank Adam Sues from Value Uncovered for mentioning this stock to me. If you don't know Adam he's an avid deep value investor who has an interest in the same types of stocks I like. I reached out to him a while back and mentioned a few obscure names and when he commented he'd already seen the companies and researched them I knew I found a kindred spirit. Adam doesn't post as often now that he's pursuing his MBA but I would highly recommend adding his site to RSS. Also I know he's looking for internships, so if you work at a value fund and have a position consider reaching out to him.

Edit: I made a slight change to this post after first posting due to a comment. I added in net income multiples to the TV Station spreadsheet. I also changed the final share total.

Background

CIBL is a small holding company that was spun out of LICT (posted about here) a bit over three years ago. LICT is a wireline company and when spinning out CIBL saddled it with a lot of seemingly random assets. CIBL has ownership interests in the following, two Iowa TV stations a wireless partnership interests in New Mexico, a loan to a LICT subsidiary and 10,000 shares of a privately held company Solix Inc.

The company has a familiar face on the board, Mario Gabelli of Gamco investors. Gabelli is a Graham and Dodd value investor, so there is some comfort there that value should be maximized for shareholders.

Structure

To understand CIBL you have to understand their holdings, and the structure of the holdings. CIBL doesn't own the TV stations or wireless partnerships completely, they own interests in these entities. CIBL owns 20% of WHBF and 50% of WOI-TV ABC.

The wireless partnerships are a bit more complicated, CIBL owns 51% of Wescel Wireless which in turn owns a 33% interest in New Mexico RSA #5 and a 25% interest in New Mexico RSA #3. CIBL also owns a portion of Wescel II which owns 8.33% in New Mexico RSA #3. The RSA's have a wireless service area of 160,000 people. The general partner on the wireless interests is Verizon Wireless and the wireless service is sold as Verizon.

Why is it cheap?

I have what I think are the reasons that CIBL is selling at such a low valuation.

Limited float - Most of the float is owned by Gamco partners, this ties into the first reason.

No SEC filings - A lot of investors pass companies that don't file, CIBL is unlisted but publishes audited financials on their website.

Complex structure - CIBL doesn't own any of their assets outright, they own interests in assets, this could complicate a valuation.

All of the reasons for cheapness can be summed up in the statement that CIBL is a very small unknown, under researched company that is hard to buy shares in. Not many people want to deal with something in the $15m range especially if the company doesn't file with the SEC. The good news is this leaves a lot of room for enterprising investors.

Catalyst

Usually I will present a company and a valuation before I talk about a potential catalyst. I'm switching things around for CIBL because the valuation depends on the catalyst.

In the latest annual report and then in subsequent quarterly reports there is a very interesting quote

"The Company has received, and is reviewing an expression of interest in certain of its remaining telecommunications properties at values in excess of the current trading price for CIBL stock. There can be no assurance that this expression of interest will result in a transaction of any sort, and the Company cannot predict the outcome, timing or any other element of this matter. However, it is possible that the result could be financially significant for the Company."

Let me summarize, someone wants to buy the wireless assets and the price for the wireless alone is greater than the current market cap which includes the TV assets among other things. Not only is the price greater than the current value of the company it's significantly greater.

Valuation

In light of the catalyst I want to break down CIBL's valuation into two parts the TV stations and the wireless assets. The way I want to look at both assets is on a buyout basis since management has stated that they intend to wind down the company if possible.

TV Stations

I did some searching and was able to find that in general TV stations usually sell for 6-10x broadcast cash flow. Broadcast cash flow is considered cash flow before depreciation, time brokerage fees, and corporate and general expenses. In addition to valuing the cash flow the value of the real estate is also considered. So a complete TV station transaction would be 6-10x BCF plus the value of the real estate. Notice that only the real estate is included not all the TV equipment, this is included in the BCF calculation, all that equipment is required to generate the cash flow.

The annual report and quarterly reports have a small footnote showing a summary balance sheet and three line income statement for both TV stations. Unfortunately the only values we have to work with are revenue, gross profit and net income. I put together a spreadsheet to estimate a potential range of TV station values based on what CIBL provides. I estimated depreciation at 8% and the real estate portion at 10% of PP&E. Both of these are estimates, 8% is what I've seen for capital intensive businesses, and 10% is based on the fact that TV stations need to buy a lot of expensive equipment to broadcast, it seems that 10% is probably a reasonable estimate for what the real estate is worth.

I put together a spreadsheet based on the 2010 annual report numbers. Trailing twelve month numbers are in the Q3 report, but I don't know enough about TV to extrapolate what a fourth quarter might look like. The Q3 numbers appear to be trending a bit better than last year at this time so if anything I'm a bit on the conservative side if the fourth quarter is similar to last year.

As you can see the range I came up with was $5.4m to $13.8m for the interest CIBL owns in the two TV stations. I find it interesting that the high end estimate is basically the market cap of CIBL.

If you're uncomfortable with my estimated BCF I have multiples of net income in the spreadsheet as well.

Wireless

As expressed in the company's MD&A there has been interest in buying out a part or all of the wireless assets for more than the current share price. So when thinking about a valuation it's safe to put a downside on the wireless assets at the current market price of $15m.

I did a lot of Googling and found some references stating that rural wireless companies have sold in the 9x EBITDA range over the past few years. Like the TV interests breakout we don't have much for the wireless outside of revenue, gross profit, net income either.

I put together a spreadsheet like I did for the broadcast assets and I valued the wireless on two different metrics. The first was I created an estimated EBITDA, I used 15% of revenue for depreciation, and figured the long term liabilities were debt at 5%. The second metric was I just did a straight valuation based on net income. This is a much more conservative approach, but even the lowest net income multiple valuation is higher than the market cap alone.

Here is the spreadsheet:

Other assets

When looking at a valuation there are a few other assets that CIBL owns that need to be valued as well, these include a note to a LICT subsidiary and 10,000 shares of Solix Inc a private company. For the purposes of a breakup valuation we can probably take the note at face value which is $961,000 as of Sept 30th. The note has a 5% interest rate and LICT's subsidiary has been paying it down over the past few quarters.

The value of the Solix stock is really tough, the company seems to be decent sized with over 400 employees and 65,000 sq ft of office space in NJ. I couldn't find much beyond the typical webpage marketing fluff. Solix could have 25,000 shares outstanding and this is an extremely valuable position or they could have 2b shares and the 10k that CIBL owns is a teeny tiny footnote. Due to the uncertainty I'm going to just assign a value of zero to this position.

Putting things together

When looking at the pieces of CIBL the absurd valuation is clear, for CIBL to be fairly valued at current prices the TV stations need to be worthless, and the wireless partnerships are valued at 3x net income.

Here is the sum of the parts for CIBL:

An argument could be made that the total company won't be liquidated so an investor won't actually see this sort of return. I would agree, but CIBL seems intent on paying out extra cash as dividends so in the worst case the return from the subsidiaries is paid out to shareholders while they wait for a liquidation. I would also say that as CIBL has sold off assets in the past they've returned the entire proceeds to investors as a special dividend, so I'm not sure why a wireless asset sale would be any different.

Other resources

Another way to approach a valuation of CIBL would be to look at the cash distributions from the subsidiaries and value the company on a multiple of cash distributions. If the company wasn't considering divesting a portion of itself I think this would be the best way to value CIBL. For anyone interested I put together the cash flows for the last few years into a spreadsheet and have a picture of it below.

Summary

CIBL is fascinating in that the obscure structure masks the true valuation. Management seems to know what the company is really worth and is attempting to sell off pieces, the problem for investors is that shares are hard to obtain.

I recognize that with this valuation I used a lot more assumptions than I normally would, but even in a worst case scenario where the wireless sells for 3x net income I still have a very large margin of safety. The point of a margin of safety is to protect an investor against errors in assumptions. If CIBL sells their broadcast for 2x BCF and wireless for 2x net income I would still make a profit at the current price.

53 comments:

thanks for the post – and interesting breakouts. it is fair value here in my opinion. I think your values are potentially very aggressive. a couple things here:(1) TV stations: your cash flow proxy on the TV stations is greater than the gross profit – that is not possible or likely. also – the capex is real, so you shouldn’t add back depreciation. the TV stations have a lot of debt at the operating level also, so I would be careful assigning such a high PE multiple. you make these adjustments its easy to see a <4M value for this (which is what I use). it only earned 70k in Q3 so if anything id be worried its worth much less.(2) wireless: verizon itself only trades at 4x ebitda – so why would you value a JV partner much higher, especially with such little disclosure (and basically inventing an ebitda number?) the distributions, if you talk to management, are a pretty good proxy for the FCF, so at about 2M a year, you’d value this up to 25-68M? really? 15M I could see, maybe 20M, which is over 10x cash flow, but that is a stretch(3) management fees and taxes? you are assuming the company liquidates but it might not. infact I think its unlikely. you are taking the net income at the segment level but not deducting for the taxes that CIBL has to pay or the overhead that is taken from the business every year. again if it doesn’t liquidate this is relevant and reduces the segment value by at least the tax rate.(4) this “expression of interest” is about 2 years old now, yet they keep putting it in the reports because it gets people excited. if the buyer was so interested, why have they not closed? they did the same thing with LICT and eventually stopped talking about it when the stock price got higher. (5) considering how illiquid this is (I only got a couple k worth in my PA after buying for a long time, and the company wouldn’t buy back all my shares at the bid), I think you need a huge margin of safety here. (6) so I do 4M (TV) + 17.5M (wireless) -5M (taxes and management fee cut) = 16.5M, or 656/sh. barely any ups if you were to get at the bid, which in my experience you can but only in small size.

Thanks for the comments, this is why I love doing the blog, the quality of feedback is impressive.

From both comments it seems that a sale is unlikely, is this based on the fact that it's taken a while to dump the wireless? I know they recently sold off the Giant Communications company and returned that cash to shareholders. I can't imagine it's legal to put a line in the filings just to get investors excited. That's junior miner type stuff, but maybe CIBL is at that level.

1) Good point on the TV valuation, I agree capex is real but the stuff I had found said TV is valued pre-capex. Could this be due to the fact that an acquiring company might already have equipment that they could use?

I went back and looked at the TV stations as a multiple of net income and even at 5x net they're worth $5.4m and 10x net $6.4m to CIBL.

2) Companies pay all sorts of values for acquisitions all the time they aren't bound by what they themselves trade at. Verizon also has a collection of internet and wireline assets whereas CIBL's partnerships are a wireless pure play.

So based on your comment it seems as if you've discussed this with CIBL and they claim that the cash distribution from the wireless is appropriate as a valuation measure?

My lowest case is 5x net for the wireless, I think that's pretty conservative. The wireless has been growing and the trailing nine months profit is greater than the full year profit for last year. As I mention in the post just wireless alone is trading at 3x net income as implied by CIBL's valuation. I realize these assets are in New Mexico but I just don't see a P/E of 3 as a fair price.

3) Agreed, my assumption is that they liquidate, if they don't I included the cash flow statements and made a comment that the cash flow which implies the management fee is a better valuation.

4) I agree on the timetable issue, but maybe I'm not cynical enough to buy into the fact that management just put some fake interest in the report to get people excited.

5) I completely agree, I was only able to get a fill on a few k as well, I think it would be nearly impossible to build a big position.

So I'm getting my worst case as 5x P/E on the wireless which is $22m and $5m for the TV stations still $27m. That's still a double from here if you subtract out the cash and loan receivable.

Curious as to why you're still a shareholder if you think it's fairly valued here. Is it that you're unable to unload your position?

2) yes, my understanding is they are paying out/upstreaming all the FCF. could you break out your 3x P/E reference? I have very different numbers for cellular earnings. perhaps you arent deducting non-controlling int? the $15.275M they show in the financials for Q3 doesnt take out non-controlling, it is just baseline. in the Q311 MD&A they explicitly state "Equity in earnings of affiliates increased by $1,536,000, or 42.3%. The increase was due to a $1,493,000 increase in earnings from the Company’s investments in its cellular interests." Annualize that (although Q4 is the weakest quarter), its $2m, so wouldn't it be backing into 8-9x? granted, growing that much @ 8-9x might be great.

4) this is something I battle with. I get where you are coming from, just if you go back and look into LICT they said the same thing in '08 and then didnt. shares down big when people realized. they also have been talking about this "indication" for some time now, fake or not, just like a merger that keeps getting extended..I just think it becomes less and less likely. management has definitely done all the right things though so I would think if the offer was "real" they would have got it done. still have to disclose indications, even if they are unlikely to close.

oh sorry for full disclosure i'm no longer a shareholder - sold @ 600ish - just happen to have been in it for a few years and followed LICT for years before that.

meanwhile this 8x ebitda indication for similar assets is an interesting note, never saw that before.

re: the other anon question on brokers, I have inquired with a lot about sourcing blocks and can say no market maker actually has some...best bet is to just throw in a bid through etrade - you have to call the desk to request the order just given illiquidity.

re: adam's comment, "2008/2009 wouldn't be an ideal time to be selling much of anything..so I really don't see many red flags with it taking a year or 2 to close the deal." what other deals do you know that took 2 years to put out a statement/preliminary doc/press release on?

I took the entire earnings for the cellular partnership (controlling and non-controlling) and then did a 5x P/E and 9x P/E. The results of those were $76m and $137m. I then took 33.81% of that value because that's the portion that CIBL owns of the cellular partnerships. At 5x CIBL's interest would be $25m, so I walked down the multiple until I landed at a multiple for the earnings equaling the market cap.

Another way to look at this, the cellular partnerships earned $15.275m during the first nine months, 33.81% is CIBL's stake in those earnings equaling 5164. Market cap is $15m/5164m = P/E of 3.

I realize that CIBL isn't reporting this exactly because they have their own expenses and taxes etc. If you include this friction you basically get the cash flow multiple of 8 or 9x that was mentioned above.

1) Buyout issues - The two year issue is a problem, I want my money quickly and each month that ticks away it seems that maybe a deal won't get done. I'm also wondering though in light of the WWVY information if this is a deal that Verizon extended to all partners that's open ended. The 8x multiple is good news, it gives some meat to the thesis, but the meat is worthless if management doesn't move on it.

Of LICT and CIBL I would much rather own CIBL (and I do) because I believe the assets still have value and at least the cellular is increasing in value. The LICT assets are in a state of decline.

I'm somewhat encouraged by the Giant sale last year but I'd love to see them close this wireless thing quicker.

2) Buyback - I agree that it's interesting the company is buying back their own shares. I also find it curious that the CEO's title is "Interim CEO". I believe they see value here.

Thanks again for the excellent comments, sorry for the delayed response. I've actually been mulling these questions over a lot in the last few days.

Thanks Nate, that is helpful. I do see where you are coming from, I'm just still puzzled why CIBL, if its share of wireless net income is $5M why it doesn't recoginize an amount anywhere close to this number on its own income statement? You would think cash flows might also be higher...

Nate - im nearly 100% positive that the 3x you get is because you really need to take the 33% and then multiply that by their 51% interest in the parent entity, and then it should reconcile almost exactly to the earnings number in the income statement. Put another way - I think you are treating the entity as a see through, but in reality they are giving you the overall results for the entire partnership, of which they own 33% of the 51%. You get what I am saying? So multiple is much higher.

1) A reader pointed out to me that Solix is carried at $100k, I missed this in reading the annual report.

2) As for concerns that the company might never sell note that the CEO's title is "Interim CEO". There seems to be a temporary nature about the position, this doesn't mean anything but I take it as a good indicator.

Love the blog. I'm having trouble finding a broker that allows for the purchase of CIBY, who do you use, and do you have any recommendations for brokers that trade in obscure securities such as those on the grey market, etc.?

Hi Interesting post.Regarding the wireless assets, you might want to take a look at WWVY which has a similar partnership with Verizon. But Verizon is claiming that when they build 4G, that is a different service and WWVY will not be entitled to a share of the entity. I imagine that will go to litigation but there might be a similar risk here.

You raise a good point on looking at WWVY and their partnership with VZ. Note than on 6/2/11 WWVY agreed to sell their partnership interest to VZ at 8 times Partnership EBITDA. I am resasonably confident that VZ has made same offer to CIBL.

Great post, and pretty reasonable assumptions IMHO. It doesn't take a big multiple for it to work out very well for CIBL shareholders..

Just taking a quick glance back through the annual reports, the wording about the catalyst appeared in the 2008 report but doesn't appear to be there in 2007 - I didn't bother going back through the quarterlies but obviously 2008/2009 wouldn't be an ideal time to be selling much of anything..so I really don't see many red flags with it taking a year or 2 to close the deal. With the Giant transaction, management has proven to be able to divest assets and then distribute that cash to shareholders.

I wasn't able to purchase shares through Interactive Brokers (which is unusual- and most of the CS reps I spoke with didn't have a clue why, except for the fact IB had decided to allow no trades), or else I would be in for a position as well.

And thanks for the plug and very kind words! And glad someone is writing about these ideas, as my time has been consumed by school work & interviews, and not nearly as much investing as I would like!

I really want to congratulate you for your work and your blogMy question is about some stcoks you discuss, some of them are really illiquid (thinking of SODI). Is it possible to invest more than 15k-20k in one of them?. Suppose the managed portfolio is about 300k-500k, are these really illiquid stocks useful then?.Sorry for all the questions it is just i can´t understand how to handle these stocks for practical purposes. Thank you very much.

Anon - Thanks for the info on WWVY and the partnership buyout which is probably similar to the offer that CIBL got. I have a lot more confidence in CIBL's management on returning the cash than WWVY's. Good info either way, it helps to justify some of the calculations I put together.

Adam - Thanks again for passing this along hopefully the position works out! More importantly hopefully your internship works out and eventually you end up doing this stuff full time. I have to be content with a few hours here and there. I agree that the market has priced CIBL so low that even a low value on the wireless buyout will be a win for shareholders.

Thanks for the compliments on the blog. You've asked some great questions.

In terms of a 300-500k portfolio I think these illiquid stocks have a place for sure but maybe not the same place that a Intel or MasterCard might have. I would recommend (and it's what I do) diversifying across a lot of these companies that are priced very cheap.

For example for a 500k portfolio maybe allocate 200k to undervalued small/micro cap stocks which could be things like CIBL or SODI. You're right in that it would be hard to build a position bigger than 20k or so but I think that's alright. You would probably be better off buying 20 stocks with 10k positions then trying to find the best three or four and building larger positions when them. The reason I say this is that a lot of these smaller companies have the potential of a key supplier or key customer disruption and while they're very cheap I think diversification can really pay dividends with them.

A lot of people prefer concentration because diversifying can kill returns at a certain point. With a lot of the stocks I write about the small illiquid ones I'm looking to invest when I can double my money or more. I won't invest in something illiquid for a 25% gain, it's simply not worth it. So if you have 20 ideas where you expect to double your money your 19th idea is probably just as good as your 3rd idea. Having a larger number of ideas doesn't dillute like it would in a focused larger cap value portfolio.

Hopefully this makes sense. For my own portfolio I have three categories of stocks, longer term holdings that can compound at high levels (hidden champion types), net-net/small value companies, and special situations like spinoffs. I would classify CIBL in the special situation category. I don't shoot for any sort of weightings it just happens these types are the three types of companies I'm familiar with and comfortable valuing. Other people may invest differently.

Thank you very much. A truly fantastic explanation.I never thought about illiquidity in that way. Your answer gave me a whole new way to look at dillution in very small caps.

I thought that someone like Paul Sonkin diversified so widely because of necessity but i thought it could really lower his returns. Now i see that it shouldn´t be.

Also it is always very helpful to read knowledgeable investors like you talking beyond individual stocks and the way they construct their portfolios and the philosophy behind it. Maybe you can post something more about it in the future.Thanks again.Regards.

Nate - When you are done with CIBL, you should take a look at ICTG. It is another spin off from LICT that is not yet trading. It is identical to CIBL in the sense that it conatins wireless assets as well as an ILEC. These assets are located in North dakota right in the middle of the fracking boom.

Thanks for the url, I actually looked at this company a little bit when I was looking at LICT. It looks like the shares trade OTC, last trade 12/29/11, last price $34.50.

At first glance it doesn't look that interesting, 7% CF yield and 3% FCF yield approx. Some debt and the company intends to acquire a lot more assets which based on the low cash flow could only come from debt or equity financing.

Nate - One other thing you should look at in May is whether CIBL's partnership received any additional money from dividend paid by VZ/VOD wireless partnerhsip that has been in the news. The issue came up on VOD's earings conference call where they said that VZ wanted to buy in all their partnerships.

For what it's worth, VZ tonight bought in wireless partnership RSA #6 in New Mexico. CIBL owns interests in RSA #3 and 5. Terms of deal not yet announced. A deal is coming. My guess is CIBL is trying to figure out how to structure it in a tax efficient manner.

My rough value is $800/share for the wireless ($20mm based on 8x ltm net cashflow). I think the TV value should really be written off because there's no catalyst in sight for that roughly $200/share value and the already non-existent liquidity on the stock will be even worse once the wireless deal is done.

This looks like a buy if you can get in again closer to $600, but not at the current levels.

I have no problem paying 15% dividend tax this year rather then capital gains tax of over 30% if you live in a state like NY. Also watch how they restructure the company, that is why it's going to a shareholder vote. I note bid is now at $850. Put your money where your mouth is and sell your shares.

PS - I see annual EVITDA between $4-5MM/year so at 8 x's we are looking at $32-40MM for wireless.

I'm just looking at the net cash distributions received from the wireless segment in the "Liquidity and Capital Resources" section of the quarterly reports. $1.9mm received for the nine months ended 9/30 + $0.7mm for 4Q10. On a JV like this, they'll typically just look at the net cash flow from the JV, versus a true EBITDA calc.

The shareholder vote is due to the relative size of the asset being sold. There is typically a transaction size test on the asset, revenue, and income level to determine materiality. This would trigger the shareholder vote. They certainly could be restructuring the company, but that is speculation and not the (only) reason for the vote.

I don't doubt the payout could be higher, but from a margin of safety standpoint, it's hard for me to get there comfortably.

I could be missing something, but the WWVY deal was a different. That deal gave WWVY a put option so that they could sell their 8% interest to Verizon in April 2013 or 2014. The sale price is the larger of 5x their share (8%) of the JV EBITDA or $50k (roughly 3.85x 2013 net (8%) distributions from the JV). That means that 5x EBITDA is the number to use. It's interesting here that the floor value ($50k) implies a smaller net cash flow multiple, where I would expect net cash flow to be a lower value than EBITDA (ie net of maintenance capex, etc.) and imply a higher multiple.

The CIBL deal is obviously different and in fact seems to be a different type of asset. Regardless, I think these details make the bullish case less strong.

Did you see 8x somewhere where I'm not looking?

This is the press release: http://www.wvtc.com/index.php?option=com_content&task=view&id=412&Itemid=397

This is the actual agreement: http://www.sec.gov/Archives/edgar/data/104777/000114420411045048/v231337_ex10-4.htm

The first part of the deal was payments of of $13MM for 2011, 2012 and 2013. So, that's three years at $13MM plus a payment of 5 x's the $13MM (or $50MM) in 2013 or 2014. So by my calculations that's 8 times.

No big deal. You see it as 8 x's distribution. I am confident there is no way that Gabelli and his crew agree to that way of valuation when WWVY was done on a multiple of EBITDA.

so we have 750/sh after tax, but the problem is they have exhausted the return of capital, so we would also have to pay dividend tax, which is troublesome. so you are implied paying about $200/sh for the tv assets, not much of a spread.

Yeah, agreed, I sold out of my shares this morning at $950. I figured the $750 plus $200 for the TV assets. There's some misc cash on the books but I figured I'd rather have $950 today then $1100 in two years once the TV stations are sold.